The Employment Appeal Tribunal (EAT) has given its Judgment in the joined cases of Bear Scotland Ltd v Fulton, Hertel (UK) Ltd v Woods and Amec Group Ltd v Law regarding holiday pay.
The EAT ruled that all elements of a worker’s normal remuneration must be taken into account when calculating holiday pay.
This includes payments in respect of non-guaranteed overtime (i.e. overtime that the employer is not obliged to provide but which, if the employer offers it, the worker is contractually obliged to perform).
The obligation to give workers paid holiday derives from the European Working Time Directive and the UK Working Time Regulations. Previously, these rules have been interpreted as saying that it is lawful for employers to calculate holiday pay by reference to basic pay only. Therefore, the EAT’s decision represents a significant change of approach and has potentially widespread implications for all employers who use overtime.
Implications of the EAT’s decision
The effect of the EAT’s decision is that employers will need to take into account overtime pay (including non-guaranteed overtime) and other payments such as commission and travel pay in their holiday pay calculations.
This ruling is limited, however, to a worker’s entitlement to four weeks’ paid holiday under the European Directive. It does not apply to the additional 1.6 weeks’ paid holiday which is provided for under the Working Time Regulations.
Can workers claim backdated holiday pay?
The legal position prior to the EAT’s decision was that workers could make claims for a series of underpayments of salary (which could include miscalculated holiday pay) stretching back for an unlimited number of years.
Surprisingly, however, the EAT has held that claims for backdated holiday pay can only be raised in relation to a series of underpayments where there is less than a three month gap between each underpayment. Therefore, for example, if an employee took a holiday over three months ago, they should not be entitled to claim backdated holiday pay for that holiday or any earlier holiday.
As a result, the Judgment significantly limits the scope for retrospective holiday pay claims. The scope for claims is limited further because only the four weeks’ leave under the European Directive is taken into account and the additional 1.6 weeks’ leave under the UK Regulations can be discounted.
This part of the EAT’s decision is controversial and is likely to be the key issue in any appeal. If this part of the EAT’s decision is overturned, the impact on businesses could be very significant as there would then be no limit on how far back a claim for a series of deductions can go. Therefore, in theory, backdated claims for holiday pay could be made back to the start of employment, with a longstop date of 1 October 1998 (when the Working Time Regulations came into force).
Does this apply to all overtime?
The EAT held that there are different categories of overtime, which are as follows:
- ‘guaranteed overtime’ which is work the employer is obliged by contract to offer as overtime, and therefore will be liable to pay for, even if the employer has none available to offer at the time;
- ‘non-guaranteed overtime’ which is work that the employer is not obliged to provide but which, if the employer offers it, the worker is contractually obliged to perform; and
- ‘voluntary overtime’ which is work the employer asks a worker to do but which the worker is free of any contractual obligation to perform (unless the worker agrees at the time to do the work).
The EAT concluded that holiday pay should be based on typical average pay, and that this includes guaranteed overtime pay and non-guaranteed overtime pay, as long as it is paid sufficiently regularly over a period of time to amount to normal pay. However, the EAT’s Judgment is unclear on whether voluntary overtime should also be included. This is, therefore, an issue that needs to be considered carefully by employers before making any changes to their holiday pay arrangements.
Calculating potential liability
If the calculation of holiday pay could now be an issue for your business we recommend that you carry out an immediate assessment of the potential liability.
In particular, you may find it useful to:
- Review your overtime arrangements to ascertain whether overtime is non-guaranteed or voluntary and how regularly overtime is used.
- Assess the amount of overtime taken on average by workers in order to calculate the potential cost, going forward, of additional holiday pay for four weeks’ working each year. The Regulations provide for a twelve week averaging period for cases where overtime varies.
- Consider whether you make other regular payments to employees, such as commission or travel pay that may need to be taken into account.
- Establish when workers took their last holiday to ascertain whether there is a gap of at least three months. If there has been a three month gap, they would be out of time to bring a backdated claim (based on the EAT’s decision).
- For workers who have taken holiday within the last three months calculate how long the breaks were between previous holidays they have taken. If there is at least a three month gap between one holiday and the next, they will be out of time to bring a claim in relation to earlier holidays.
Potential next steps
The EAT has given leave for its decision to be appealed to the Court of Appeal. It has also been announced that the Government is urgently setting up a taskforce to assess the impact of the EAT’s decision on UK businesses and how to limit it.
However, as it stands today, holiday pay should be calculated to include overtime and workers could potentially bring claims if it is not.
Some companies will no doubt wait to see if the EAT Judgment is appealed before making the decision to pay overtime as part of holiday pay, particularly in light of the uncertainty over the regularity of overtime and voluntary overtime. If the decision is appealed and subsequently overturned, employers who increase holiday pay to include overtime will find themselves in a position where holiday pay has been increased unnecessarily.
However, there is no guarantee that the decision will be overturned. Further, the helpful limit on backdated claims has been identified as a key point that could be challenged by the Court of Appeal. Therefore, companies that increase holiday pay now to include overtime have an opportunity to limit significantly the chances of backdated claims in the event that the three month gap decision is overturned. This is because they can ‘start the clock running’ for workers to bring claims for backdated holiday pay and workers will only have three months from the date they are paid overtime as part of their holiday pay to bring any backdated claim.
In any event, this is not a decision that can be ignored and businesses should assess the potential impact of these cases as a matter of urgency. In terms of financial planning, companies may also want to consider making accruals in their financial accounts for future holiday pay to be calculated by reference to both basic and overtime pay.
How we can help
Myerson Solicitors LLP regularly advises companies on holiday pay issues. If you would like to discuss any of the issues raised in this articles further, or how the EAT decision affects your business, please do not hesitate to contact a member of our Employment department.
Myerson Solicitors LLP are premier employment solicitors in Cheshire and Manchester. Our expert solicitors advise on all aspects of employment law, including tribunal claims, TUPE transfers, contracts of employment and settlement agreements.
This article is intended as a guide only. Calculating holiday pay is very fact sensitive and specific legal advice should be sought in relation to particular circumstances.